Often, those struggling with finances and debt believe that bankruptcy is the only course of action available to them. However, there are many other options that will help you on your way to the ultimate goal: discharge of the fiduciary duties after a performance of the required payments.
Many Canadians are not aware of what a consumer proposal is, let alone a Division 1 proposal or informal debt management. In this article, we will explore the alternatives to bankruptcy and look at how they differ from each other.
What is a consumer proposal?
A consumer proposal is a formal, legally binding process overseen by a licensed insolvency trustee, (formerly known as a trustee in bankruptcy). When you begin working with a trustee, they will review your financial statements and decide which debt management program is right for you. The process is available to individual debtors whose total debts do not exceed $250,000 (excluding the mortgage on their principal residence). If you decide to opt for a consumer proposal, your trustee will help you with creating one. Your creditors will be offered a certain amount of money based on your situation to settle your debts.
The creditors will take a vote on your proposal after submission, and if they accept the sum of money proposed by you and your trustee, you are able to settle your debts. The agreed-upon amount will then need to be paid back within the stipulated amount of time, (which is usually five years aka 60 months). All the payments are made as a single monthly payment to the insolvency trustee, who will then distribute the funds as dividend payments to your various creditor(s).
What happens when filing a consumer proposal?
Filing a consumer proposal comes with its own set of important responsibilities that you must fulfill. You will need to give your trustee a full and complete list of your assets and debts, which will aid your licensed trustee to file the consumer proposal. There may be a meeting with your creditors if requested.
After the consumer proposal is filed, you will also need to complete two financial counselling sessions, which are meant to aid consumers in their journey to financial literacy.
If your consumer proposal is accepted, you will be required to pay off the sum within the stipulated time period or with regular payments. Essentially, all the terms in the proposal must be adhered to in order to avoid the consumer proposal being annulled. Avoid getting the proposal annulled if possible; otherwise, the agreement will no longer apply, leading to your creditors being able to take action to collect the money you owe them.
Your consumer proposal can get rejected; in that case, you can make changes to it and re-submit or discuss other options for resolving your financial issues, such as declaring bankruptcy.
How is bankruptcy different from a consumer proposal?
The main difference between a bankruptcy and a consumer proposal is that in a proposal you are able to retain all of your assets. Like a bankruptcy, in a proposal, all actions launched against you by your creditors will be stopped. From there, once the creditors have agreed to the settlement offer, the dollar value of the settlement stays consistent.
What is a Division 1 proposal?
This type of proposal refers to a legal proceeding that can be carried out only by a Licensed Insolvency Trustee as an alternative to bankruptcy. This proposal can be filed by an individual or corporation. Similar to a consumer proposal, a Division 1 proposal involves working with an insolvency trustee to put together an offer to pay off your creditors what is owed them. A percentage of what you owe will then need to be paid off within a specific period of time, both of which will be included in the agreement.
The following are the minimum stipulations to be able to qualify for a Division 1 proposal:
1. Your total debt must exceed $250,000.
2. Your debts must exceed the value of any and all assets you possess; that is, you must be insolvent.
3. You must be an individual or corporation that resides in or carries out business in Canada.
If the terms of your proposal are defaulted on, or your creditors vote against the Division 1 proposal, then you would be deemed bankrupt.
How is a consumer proposal different from a Division 1 proposal?
Consumer proposals and Division 1 proposals both differ on a number of points, such as:
1. Consumer proposals are for individuals with less than $250,000 in debt (as noted above), while Division 1 proposals are over $250,000 in debt.
2. While consumer proposals are available only to individuals, Division 1 proposals are available to individuals, receivers, and liquidators of an insolvent person’s property.
3. While consumer proposals require two mandatory counselling sessions to be attended, for a Division 1 proposal counselling sessions are not required. However they are encouraged as most people can benefit from assistance with financial rehabilitation.
At the same time, consumer proposals and Division 1 proposals do have some similarities. For example, in both cases, the tax refunds go to the debtor, the time period (around five years) is the same, and the settlement offer must be better than what creditors would receive in a bankruptcy.
What is an informal proposal or informal debt management?
An informal proposal is something you could do without the assistance of a licensed insolvency trustee, and is also known as informal debt management. You can even enter into an agreement such as this with a creditor on your own. It involves a written offer to your creditors to pay an amount that will total less than the full value of the debt. This only issue is that this type of agreement can also be unenforceable because it is informal and not following a set of laws or registered through the government.
Contact Kevin Thatcher
If you’re struggling to decide which proposal is right for your financial situation, don’t hesitate to reach out to our team for a free consultation to get you started on your debt-relief journey. To set up a consultation or meet with a Licensed Insolvency Trustee, call Kevin Thatcher & Associates at 1-888-702-9801 or contact us here.